With up to 50 percent of new small businesses failing in the first five years, finding ways to keep the cash flowing is critical, especially in those early days. If all customers paid their bills on time and your business never bought any stock without selling it quickly, then everything would be fine and dandy. Sadly though, it’s never as straightforward as that. Especially if you’re a B2B company, customers can and do take several weeks to clear invoices. And even with careful planning you can find yourself hanging on to inventory much longer than you anticipated. Juggling the balance sheet is a constant challenge and so in this article we share some tips on how to make it easier to keep the cash flowing in your business.
- Monitor the three vital signs
The three vital signs of cash flow management are collection days, inventory turnover and payment days. Collections days is the measure of how long you wait to get paid, while inventory turnover measures how long your inventory is sitting around unsold, and finally payment days is how long you wait to pay your vendors. It’s important to regularly monitor all three vital signs so that you have a clear handle of where your business is at. Good cash flow management is all about balancing these three factors, rather than how much money you have in the bank on any given day.
- Chase up your receivables sooner rather than later
Receivables is the accounting term for all the money that is owed to you in unpaid invoices. Don’t set overly long payment terms that some of your creditors will happily take full advantage of. Keep it short to say 7 or 14 days to set a clear expectation of prompt payment. And if that payment isn’t forthcoming on the due date then don’t be shy about chasing it up.
- Too much inventory sucks up cash
Yes, you need to buy stock or build product before you can sell it. But the truth is your suppliers will expect to get paid regardless of how much product you actually sell. Getting the right balance between having enough stock and too much is essential to good cash flow management.
- Growth eats up cash
And the faster your business grows, the more cash you’ll need. You can be acquiring more stock and selling extra product, but if your customers are consistently slow in paying you then you’ll soon run out of cash. Of course, you will want to grow your business as quickly as possible, but make sure that you adequately factor in the extra financing you’ll need to sustain it.
- Keep your bank in the loop
Banks don’t like surprises and so if you see a problem looming with creditors, or a period of growth on the horizon, then adjust your financial projections and make sure you inform your bank as soon as possible so that you get them onside.
Don’t let your business become another failure statistic. Keep on top of cash flow management by sticking to these key rules.